Thursday, October 22, 2015

"Would life insurance companies that pay returns likely go under if bond yields go down--some have already dipped into negative territory?"

Good question! Shows thoughtfulness.

Given the average maturity of a major life insurer's bond portfolio of 8-10 years, this would take some time. Most likely scenario, would be "Japanese" style life insurance returns of lower and lower yields, decreasing cash value growth, but preserving death benefits given the highly accurate actuarial probabilities in predicting loss of life from a given large pool of individuals. (Think about it, most people strive much harder to preserve their life, than a dent in their car, for example.)

But, let's look at history--with a focus on what has happened to life insurers under great and lengthy duress. Are they safe? Relative to whom?

In the 1930's Great Depression, interest rates were similarly low. ~20 life insurers went into receivership, all of them purchased by other insurers. Virtually all of their claims, however, were paid by solvent reinsurers.

In "stark contrast" to life insurance companies, more than 4000 bank failures occurred between 1929-1933, losing  ~$1.3 billion of depositors money. (See:

It's too bad more life insurers don't open up checking accounts!

Actually, despite the economic difficulties during the Great Depression, and some of the life insurer's difficulties, the life insurance industry provided a critical source of liquidity (many partially liquidated their policies for the cash values) upholding the economy during a time when other sources of liquidity were limited.

Even Hollywood will remind you, if you remember the banker in "It's a Wonderful Life". Knowing everyone had lost their savings and home values (extending into WWII times--stock market took until about 1954 to recover), and that "everyone" owned life insurance, he asked Jimmy Stewart, "What about your life insurance?", when looking for his remaining assets.

The size of the available liquidity in life insurance policies can be somewhat imagined by the fact that people had developed a strong habit of entrusting their savings to life insurers after the Armstrong Investigations (see below) had strengthened them considerably through regulation. In 1930, about 120 million whole life insurance policies existed, the equivalent of one policy for every man, woman, and child in the nation.

After the Armstrong Investigations in 1905, much stricter regulation of life insurers occurred, not allowing them to own common stock, underwrite securities, etc., eventually increasing public trust enormously. (See 1930, 120M policies, above.)

Those days of saving in life insurance policies may well return, when the generations alive today who do not remember the 1930's also come to realize that "other" savings vehicles, may not be as trustworthy or as predictable as previously believed, after the next major downturn(?).

Life insurance companies have been conservatively regulated to avoid excessive equity risk and leverage since the 1905 Armstrong Investigations. This has essentially made them stable, steadily growing cash cows, with a line of buyers waiting for an opportunity to buy them, e.g., AIG history/selloff of parts of their (wholly solvent) life insurance units in 2008-9 crisis.

Furthermore, the primary assets of life insurance companies, tier 1 investment grade bonds and U.S. Treasuries, probably doubled in value during the 2008-9 crisis. Why? When markets are fearful, people (institutions) run for the safest, most liquid instruments available, U.S. Treasuries and tier 1 investment grade bonds and drive their prices higher. So insurers are often quite confident in meeting their obligations during stock market/banking crises.

Anyway, I suspect the life insurers will again be the most likely financial institutions to survive this next major downturn unscathed. A very low yield would certainly be preferable to an ultimate 89% loss in the securities market (1930's), for example. Still having all your principle with no gain (or even minor loss) at that time would be enormously beneficial (see Kennedy family history Mention, etc.).

We may know the answer to this question in the next number of years or even sooner...(?).


Robert S. Park, M.D.
Life Insurance+
Seattle, Washington
(206) 395-9501
wealth | estate | business planning

“Twenty years from now you will be more disappointed by the things you didn’t do than by the ones you did.” Mark Twain

Preserving your Savings in Safety

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